Hybrid Software Group PLC Annual Report 2022 34 35 Hybrid Software Group PLC Annual Report 2022 Hybrid Software Group Strategic report Governance Financial statements Other information Risks related to the Group’s business activities and industry (a) The Group is dependent on the graphic arts and digital printing industries The Group derives all of its revenues from products and services provided to the graphic arts and digital printing industries. Accordingly, the Group’s future success significantly depends upon the continued demand for its products within such industries. The Board believes that an important factor to consider is the substantial change in the graphic arts and digital printing industries, as evidenced by sustained growth in digital printing and low growth in conventional printing. The shift in inkjet printing technology opens up opportunities to the Group when manufacturers develop new products. If this environment of change were to slow, the Group could experience reduced demand for its products which could have a material adverse effect on its operational results. (b) There is no assurance that the Group will identify and complete suitable acquisition opportunities, on which its growth strategy relies, in a timely manner or at all The Group operates in an industry where customer acquisition costs, as well as costs for such customers to switch between suppliers, are significant. Therefore, the Group significantly focusses on strategic acquisitions to achieve growth. The success of the Company’s business strategy is highly dependent on its ability to identify sufficient suitable acquisition opportunities and, once identified, to complete such acquisitions. The Company cannot guarantee that it will be able to identify suitable acquisition opportunities or complete such acquisitions at all within the next 12 months. If the Company fails to complete a proposed acquisition (for example, because it has been outbid by a competitor) it may be left with substantial unrecovered transaction costs, potentially including substantial break fees, legal costs or other expenses. Furthermore, even if an agreement is reached relating to a proposed acquisition, the Company may fail to complete such acquisition for reasons beyond its control. Any such event will result in a loss to the Company of the related costs incurred, which could materially adversely affect subsequent attempts to identify and acquire another target business. Principal risks and uncertainties continued... Risks related to the Group’s business activities and industry continued (c) Security breaches and other disruptions could compromise the Group’s confidential and sensitive information and expose the Company to liability, which would cause the Company’s business and reputation to suffer The Group and certain third parties that it relies on for its operations collect and store confidential and sensitive information, and their operations are highly dependent on information technology systems, including internet-based systems, which may be vulnerable to breakdown, wrongful intrusions, data breaches and malicious attack. This information includes, among other things, intellectual property (“IP”) and proprietary information, source codes and commercially sensitive data, both of the Group and of its customers. Although the Group has appropriate measures in place (including appropriate insurance coverage) to protect its business from any potential interruptions, any attack or breach could compromise the Company’s networks or those of related third parties and stored information could be accessed, publicly disclosed, lost, or stolen. For example, if the Group would as a result of such an attack be unable to access its source code needed to develop new products, it might lose customers, which will have an impact on its operational results. In addition, if IP were to be stolen from the Group, such stolen IP could be used by competitors to improve their products or produce products which could reduce the Group’s competitive advantage and therefore impact the Group’s operational results in the long term. (d) Following the acquisition of HYBRID Software in 2021, the Group serves, in addition to its traditional client base of original equipment manufacturers, directly end-user customers and such customer mix needs to be carefully managed to avoid an adverse impact on its business and results of operations 38.9% of the Group’s revenue for the year ending 31 December 2022 (2021: 46.5%) was generated by customers that are original equipment manufacturers (“OEMs”), such as industrial inkjet press manufacturers, who embed the Group’s software in their own products that they sell to end-users. Although HYBRID Software does have a limited amount of OEM customers who manufacture products for package printing, most of its customers are end-users (representing 96.1% of its revenue (2021: 97.4%)), i.e., companies that create packaging files and packaging converting companies. Those companies purchase, in addition to the software of HYBRID Software, the systems and equipment from OEMs including those who are customers of the Group. As a result of the HYBRID Software acquisition, the Group directly serves certain clients of its own clients. While the Board believes that this customer mix will not have an adverse effect on the group, as is confirmed by the fact that no OEM or end-user customers provided negative feedback on the acquisition, its customer mix needs to be carefully managed in the future to avoid an impact on either the OEM sales or end-user sales and therefore on the profitability of the Group. (e) The HYBRID Software acquisition made the environment in which the Group operates more competitive, which could have a material adverse effect on the Group’s business and results of operations Because of the highly technical nature of the products produced by both the Group and HYBRID Software, there is a high barrier for competitors to enter the market. As a result, the limited number of competitors which do exist tend to be larger companies with sufficient resources to compete in these demanding market segments The acquisition of HYBRID Software and merging its products and services mix with the products and services of the Group, has increased the number of competitors the Group is facing, as companies that were used to be only competitors of HYBRID Software will now also be competing with the Group. In addition, companies that were traditionally only competitors of the Group might now also view the activities of HYBRID Software in a more competitive way. Although HYBRID Software has been a long-standing partner of the Group and such relationship was already well known in the industry, it cannot be excluded that such increased competition could result in a business disruption from both customers and suppliers of the Group which could have a material adverse effect on the Group’s results of operations. Principal risks and uncertainties continued... Risks related to the Group’s financial situation continued (d) Certain contractual arrangements with customers contain extended payment terms which lead to an increased credit risk on such customers The Group sells its products and services to a range of established customers and generally takes payments in advance for the sale of physical goods in the Printhead Solutions segment, thus minimising the credit risk. In the Printing Software and Enterprise Software segments, certain licensing arrangements allow, however for payments to be made over an extended period of time, up to five years in some instances. These extended payment terms increase the credit risk and the chance that the Group may not be paid. During the year ended 31 December 2022, €3.86 million (2021: €2.70 million) of revenue was recognised in respect of a licensing arrangement that includes extended payment terms of up to 5 years. To date, for licensing arrangements where revenue has been recognised in previous years, all contractually due payments have been received in accordance with the contractual terms. The current economic uncertainty has increased the likelihood of the materialization of such risk, as the liquidity position of certain customers could be affected by the consequences of a downward economy and the payment behaviour of certain customers could change.
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